Tuesday, May 03, 2005

Social Security Again

The simplest summary I can come up with for the President's proposal to reform Social Security is this -

Social Security is trending into the red, so to change that we are going to have to do one or more unpopular things. We will have to tax more and/or pay less. Taxing more would be really bad for the economy, and it's would either make Social Security taxes even less progressive, or force us to break with the notion that Social Security is an insurance program where each person pays his own premiums. Paying less means either slowing or reversing the trend to increase benefit levels, or start paying benefits later, or tax benefits more - with a combination of these approaches being the most likely scenario. There's something to dislike for everyone in this list of bitter medicines. Since we all know that a spoonful of sugar helps the medicine go down, the President wants to sweeten the deal by adding private accounts.

Private accounts would help solve several problems with Social Security, both as it is currently constituted, and as it would exist after the reforms. The most important problem in my judgment with the current system is that it's a really bad deal for everyone involved. By this I mean that while Social Security does solve the problem it was created to solve - older or disabled people being forced into poverty when they can no longer work productively - it does so in a very inefficient way. For the vast majority of participants, the return on funds they "invest" in Social Security ranges from -1 to 1% per year. Any way you look at it, that's a bad deal. Simply buying T-bills yourself would net you much better than that, and would have the advantage of actually being your property, which means you could leave something to your heirs when you die. In addition, the current system is a terrible deal to us as taxpayers are well as participants. Since the "surplus" (the difference between what Social Security collects and spends) is "invested" in T-bills, we hide current deficits in the federal budget. This means that down the road we will be worse off than we realize, since those T-bills will one day have to be paid off, and it's us and our descendants who will do the paying. This is a critical point. The "trust fund" is a collection of IOUs we write to our future selves and our kids - those future taxpayers will have to make good on them if the system is to continue making payments - and those future taxpayers are going find making those payments VERY difficult. And since many or most of them didn't have any say in the decision to write the IOUs in the first place, they may well decide that they aren't going to pay them back. Who could blame them? It's tremendously unfair of us to lay this burden on them, and we do ourselves no favor by hiding current budget deficits this way.

Fortunately, there is a better alternative. Modestly slowing the growth of future benefits and introducing progressivity into the slowdown goes a long way to making Social Security solvent over the long term. Allowing people to make up the difference by investing some of their premiums in private accounts would more than make up the difference, and would also give them some actual property of their own to leave to their heirs when they die, which is a first step to moving lower-income Americans into the investor class. We would also enjoy the economic benefits of a better national savings rate, and undo the destructive budgetary illusion that currently masks our true budget deficit. This is, quite literally, good for everyone.

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